Trades Criticize Proposed Stress Tests

CUNA and NAFCU say the NCUA’s proposed stress test rule for credit unions over $10 billion in assets is costly and unnecessary considering the four largest credit unions in the nation already conduct their own tests.

The credit unions affected would be the $54 billion Navy Federal Credit Union in Vienna, Va., the $27 billion State Employees’ Credit Union of Raleigh, N.C., the $16 billion Pentagon Federal Credit Union in Alexandria, Va., and the $12 billion BECU in Tukwila, Wash. The NCUA’s stress tests would be based on Sept. 30 financial data.

Under the rule, these credit unions would be required to maintain a stress test capital ratio of at least 5% - higher than the 4% minimum leverage ratio required of banks since credit unions are unable to raise capital in the form of stockholder equity.

"Navy Federal is aware that the NCUA is drafting a proposal requiring credit unions exceeding $10B in assets to undergo annual stress tests. Navy Federal remains well-capitalized, and we will be monitoring the progress of this proposal as it goes forward," a Navy Federal spokesperson told Credit Union Times on Thursday.

“Required stress testing by SECU seems appropriate. Consistent with the best practices of other federal regulators, we believe publication of stress test results, at least for SECU, is the best course. We feel our member-owners deserve to know the results. Much like CPA audits,” Blaine said Thursday.

“NCUA should consider relinquishing the stress testing process of credit unions to the Federal Reserve, which is qualified to conduct the model results. This should save the remarkable $4 million ‘outsourcing’ estimate NCUA quoted. Let’s use the best – the Fed,” Blaine said.

Carrie Hunt, senior vice president of government affairs and general counsel at NAFCU, said NAFCU has a “huge concern” over the cost of complying with the rule.

“Inevitably, we always run into this issue with NCUA in terms of looking at cost,” she said.

“We don’t think that we need this whole new stress testing regime,” she added.

Hunt said the four largest credit unions do their own stress testing to have a well-run operation.

“We have huge questions and concerns with creating a new regulation at an enormous cost to the credit union – it’s not necessary,” she said.

CUNA is also against the proposed rule.

“The agency [NCUA] will be conducting the stress testing and it’s going to cost, according to them, $4 million just in the first year to conduct this stress testing – that’s $1 million for each one of them,” said Mary Dunn, CUNA senior vice president and deputy general counsel on a CUNA conference call Monday.

“We think it’s really unclear – where did this number come from? Why is it going to cost so much and why is it necessary that the agency actually be the entity that conducts the stress testing?” she added.

Peter Duffy, a managing director at Sandler O’Neill and Partners, said he is not surprised the NCUA would propose a stress test rule.

“We expected the stress testing and capital requirements for credit unions to move toward a closer synch with community bank’s regulatory expectations. The business models and balance sheets of larger credit unions and banks have evolved to be, according to the U.S Treasury’s analysis (and our own) to be difficult to distinguish from each other,” Duffy told Credit Union Times.

“With some exceptions, the institutions are offering the same financial products to the same customers through similar distribution channels. The CUs with assets greater than $1 billion have already begun to understand this and have been discussing this with us for the last five years. We have no reason to believe that any agency would conduct testing simply for ‘gotcha’ purposes,” he added.

In an interview with Credit Union Times after the Oct. 24 board meeting, NCUA Chairman Debbie Matz explained why large credit unions should be subject to the rule even though they are not included in the Dodd-Frank Act stress test requirement.

“Our share insurance fund is $11.7 billion, so there are four credit unions with assets over $10 billion. Three of those four are larger than our share insurance fund,” she said.

“So it’s a very significant risk to the fund and there’s no reason why a credit union of $10 billion or more should not be held to the same standard in terms of forward-looking testing that other financial institutions are held to,” the NCUA Board chair said.